1. Financial science has become a driving force in well-designed portfolios. Academic evidence casts light on the challenges with traditional investment approaches, such as security selection and market prediction, and pushes advisors toward more robust, research-informed investment strategies.
2. Theoretical and empirical research identifies drivers of investment returns. For example, research shows that stocks offering higher expected returns can be identified using company size, relative price, and profitability. For bonds, information in the yield curve and credit spreads reveals higher expected returns.
3. Global information and competition further advance the market’s pricing power. Each day, the global security markets process billions of dollars in trades between buyers and sellers—and their collective wisdom helps drive securities prices toward fair value.
4. Commissions on securities trades have dropped. The rise of electronic trading networks diminishes the influence of large market exchanges, while reduced broker commissions bring lower average trading costs across markets.
5. Bid-ask spreads (cost to trade) on securities trades have decreased. For example, advanced technology and multiple trading venues reduce implicit costs by narrowing bid-ask spreads across trades. Investment strategies that have more trading flexibility can further reduce these spreads.
6. Improved access to global markets enables broad portfolio diversification. Advisors once had limited fund choices for building global portfolios. Today, they can work with fund managers that offer diversified, value-added access to US, international, and emerging markets.
7. Average mutual fund expense ratios have fallen. The market’s information-processing power works against high-cost mutual fund managers, who struggle to outperform through stock picking and market timing. Investors increasingly favor lower-cost, transparent investment approaches.
8. Cost-effective implementation has become a key differentiator in asset management. Research into the capital markets is publicly available. What matters is how asset managers can effectively implement the ideas in real-world investment strategies.
9. Securities lending has become a value-added source of return in well-run investment vehicles. The best investment managers continually work to improve returns incrementally. One value-added approach is to lend a portfolio’s securities to third parties for a fee.
10. As financial advisors, we gain access to investment solutions used by sophisticated institutions. The investment industry has evolved along with the markets. As a result, advisors can now apply strategies and tools that were once available only to large institutional investors.